What would you recommend as the best way to go long or short volatility? Long or short QQQ option straddles? OEX option straddles? S&P future straddles? Maybe something other than a straddle? I'm looking for something liquid with minimal transaction costs (bid/asked spread).
My favorite way to go long a volatility "pop" is to scalp the further OTM OEX puts. They have enormous vol skew and you can recapture your cost on the trade incredibly quickly and then just let a portion ride out at no cost...With Q Charts you can actually graph all the options...You will see how a minor loading in the VIX just completely inflates or deflates the "tails"...
If you were looking for the quick pop you might try somewhere in that range or wherever the spreads are about a dime wide and you can get the quick "pop"...But your guess on the volatility loading has to be very accurate or you are going to be sitting on something worthless...BUt the few pops make it worth the effort OEX is around 412...so somewhere around the previous July strike lows(380-385) you will still find enuf open interest and volume for people to be making a market in those catastrophe strikes
I've been selling vol like crazy this month. Good to look at the other side of the coin. I will watch these strikes over the next few days to get a feel for it. Good one.
Well Aaron, I don't mean to be taciturn but that is a question that could fill up a book or two. The basic idea is to track 1)historical volatility (statistical volatility for purests): historical volatility and future volatility are based on the movement of an underlying asset, and 2) implied volatility- calculated by the pricing model identical to the price of the option in the market. Implied volatility is constantly changing based on the option's price. Many strategies related to one's opinion of the relationship between historical/implied of the asset, and volatility throughout the montage of the asset. This might be a good place to start: http://www.optionvue.com/Articles/ArticleBuySellVolatility.htm PM me if you would like a book list.
Thanks for the article link, Avaturk. I'm specifically interested in what instruments you use to sell volatility. Do you use OEX options like Vulture?
I filter by strategy- not specifically interested in a particular asset. I will trade it if it makes sense to me. I try to stick with assets that have decent liquidity, and most of my holdings are hedged. At the moment, I am finding good calendar spreads, short straddles, long butterflies. Backspreads on some biotechs. Don't usually do OEX because back when I thought I knew everything, I lost my a** trading OEX. Now I'm looking at it again. Go figure...
Actually, I should clarify...This is not exactly how I trade the OEX the majority of the time...I use a combination of strategies...But when I feel that there are good odds that the VIX is coiling and I can scale into the OTM puts with reasonable odds of unloading them at a profit, I will use this strategy...But like anything else it has its time and its place... If/when I want to sell volatility, I typically like to have something long in front so that if I am wrong I will not be killed if I make a mistake...So if I am long the puts first and there is a massive volatility spike and then it corrects itself I will, at times, trade into a ratio spread having more short puts against a long put anchor strike...